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Should you buy Baby Bunting Group Ltd for its incredible profit growth?

Apparently the retail space is a tough place to be right now. Well somebody needs to tell Baby Bunting Group Ltd (ASX: BBN), because Australia’s largest baby products retailer just announced a stunning preliminary full year result with pro forma net profit after tax up 55.8% year on year to $10.6 million.

Key highlights include:

  • Total sales of $236.8 million, up 31.4% on the prior corresponding period (pcp).
  • Comparable store sales growth of 12.5%.
  • Pro forma earnings before interest, tax, depreciation, and amortisation (EBITDA) of $18.7 million, up 51.1% on the pcp.
  • Pro forma net profit after tax of $10.6 million, up 55.8% on the pcp.
  • Pro forma basic earnings per share of 8.9 cents
  • Final fully franked dividend of 6.3 cents per share.

The key metric that stood out for me was the comparable store sales growth of 12.5%. I believe this is arguably the most important metric for judging the performance of a retailer. It is easy to grow sales by just opening up lots of new stores, but this metric strips away that benefit and looks at the growth in sales at stores which have been open for 12 months or more.

Clearly, Baby Bunting stores are thriving at the moment. So much so it makes my favourite retail investment Premier Investments Limited (ASX: PMV) look like a laggard. The owner and operator of the Smiggle and Peter Alexander brands most recently delivered comparable stores sales growth of 6.9%.

Are Baby Bunting shares cheap at this share price?

Based on these results Baby Bunting shares are changing hands at around 32x earnings. This is admittedly quite a premium on the rest of the retail industry, but it does have strong growth prospects which may justify paying the premium today.

Although management expects comparable store sales growth to drop to the high single-digits in FY 2017, year-to-date comparable store sales have grown by 15%. This is no doubt a great start and could put the retailer in a position to deliver on the top end of its full year EBITDA guidance of $21.5 million to $24.5 million, which would be an increase of 31% year on year.

One thing that caught my eye that I believe supports long-term growth was management raising its store network plan from 70 stores to 80 stores. With the company operating 36 stores presently, this gives it a long runway for growth in my opinion.

So overall I feel there is a long-term investment opportunity here. Despite it trading at a premium, I believe it is up there with Premier Investments as a superior investment to many retail giants such as Myer Holdings Ltd (ASX: MYR).

Finally, before making an investment I would suggest taking a look to see if you own either of these rotten ASX shares. They could be harming your portfolio right now and may be best swapped out.

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Motley Fool contributor James Mickleboro has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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